A capital gift is when a property is sold to a loved one for less than the current market value, which can help the recipient secure favorable mortgage terms. Tax consequences may arise if the gift exceeds the annual limit.
A capital gift is a situation where the property is sold to a loved one for less than the current market value. The actual amount of these types of gifts is determined by subtracting the purchase price from the current market value. This approach is often helpful to the recipient, as lenders are much more likely to provide favorable terms and conditions if a mortgage is written for an amount that is significantly less than the property’s actual value.
There are several reasons why a homeowner may choose to extend a gift of equity to a relative or other loved one. In some cases, the goal is to help a loved one become a homeowner by providing that person with a degree of financial stability. For example, parents who have retired and plan to move into a smaller residence that was once used as a weekend home may choose to sell a larger residence to a child.
Extending the gift of equity often means that the child does not have to provide a down payment. This is especially true when the amount of the gift means that the child needs a loan that is considerably less than the current market value. As a result, the child has a home that has a low mortgage, will likely enjoy lower monthly payments, and has the ability to pay off the mortgage in a shorter period of time than would otherwise be possible.
Depending on the actual amount of the capital gift, the recipient may have to deal with some number of tax consequences. While many national revenue agencies do allow parents to provide financial gifts of up to a certain amount annually to their children, any capital gifts above that amount would have to be reported. This means that the gift may be considered a capital gain and subject to capital gains tax. This is true even if the tax laws allow each parent to provide gifts of equal value to the child.
For example, if the current limit on gifts is $10,000 United States Dollars (USD) per parent per fiscal year, then both parents could sell the home to the child for an asking price of $20,000 below current market value. . This could be done without generating any type of capital gains tax assessment. If the amount of the capital gift totals $25,000 USD, then the difference would be considered capital gains and would be taxable.
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